Integrating the Two South Asias

Submitted by Ejaz Ghani
On Fri, 12/04/2009

Regional Cooperation can be the key instrument to promote increased market integration in South Asia through greater flow of goods, services, capital, and ideas. This is appropriate for a region which is the least integrated region in the world, although many countries share analogous cultures and histories, as well as a passion for cricket and curry.

It is also very timely given the global downturn and the slowdown in global trade. Increased regional trade could more than compensate for the potential loss in global trade. It is estimated that increased intra-regional trade could add two percentage points to South Asia's GDP growth. This could raise South Asia's real GDP growth from 6% to 8% in 2010. Unlike fiscal stimulus, increased market integration and regional trade could add to GDP growth, without increasing public debt. It is the most efficient and cost effective instrument for South Asia to cope with the global downturn.

Increased market integration and intra-regional trade not only contributes to increased growth but it also promotes inclusive growth. It enables the lagging regions and poor who do have poor access to markets to benefit from growth. South Asia has become an emerging global power because of rapid growth and is the second fastest growing region in the world after East Asia. However, concerns have been raised that growth has not been inclusive. South Asian countries suffer from deep divides across countries, regions, sectors, and people. It is a subcontinent of sharp contrast of continental proportions. There are two South Asia’s that live in different centuries. The first is precocious. It has economic prosperity. The second is penurious. It has poverty and conflict. Both have attracted global attention for their peculiar characteristics.

The first South Asia has attracted global attention for being urban, enterprising, dynamic, and globally integrated. It produces 60 percent of South Asia’s income and is home to 30 percent of South Asia’s poor. Tamil Nadu[1], the most urbanized state in India, is an example of the first South Asia. Its per capita income is above India’s national average as well as South Asia’s average. It has well-established institutions, a traditionally strong value for education, skilled workforce, and an ability to take advantage of changing global conditions. It followed an unconventional growth pattern. It made the big leap straight from agriculture into services, skipping the manufacturing sector. It is among the fastest growing regions in the world. Rich regions also exist in Bangladesh, Pakistan, and Sri Lanka.

A passion for Cricket, one of the few things that South Asians share...

The second South Asia suffers from widespread deprivation, dispossession, conflict, poverty, and some of the worst social indicators on planet. It is home to 70 percent of South Asia’s poor. These are the poor regions. The poor regions have lower levels of per capita income and higher levels of poverty. A large number of poor regions are located in border areas. Lagging regions and land locked countries tend to suffer the most from lack of market integration within South Asia.

South Asia stands to gain from integrating the two South Asia’s. The poor regions that are often along the borders and landlocked stand to gain the most from one South Asia. Growth benefits of market integration are likely to be large but unequal. India, a large country, with a big home market, can get by with more restrictive borders. It is lagging regions and the small, land locked countries, like Afghanistan, Bhutan, and Nepal, which will benefit most from improved access to the markets of others.

Small countries depend more on openness to overcome the disadvantage of size: small population, small markets, and inability to take advantage of agglomeration and scale economies. Even within India, the peculiar geography that isolates the seven North-Eastern states (the so-called 7 sisters) from mainland India with the location of Bangladesh in-between suggests that market integration requires trade and transit arrangements with neighbors to benefit all regions that are lagging and isolated from the growth centers. We have already started work in the lagging regions of North West which include Afghanistan and the lagging regions of Pakistan on trade and transport to promote development. I am sure we can extend the trade and transport work in the South East. It will benefit of poor people in the lagging regions.

In what ways do you think South Asian countries should better integrate to improve development?

Next week[2], I will discuss this issue in more detail and how the region should overcome its infrastructure deficit [2]through better integration and become more competitive in the global economy.